3 Part I: Introduction Equity v. Debt FinancingAdvantage of equity financing:flexibilityAdvantage of debt financing:tax deductible,Benefit shareholders if the borrowing rate is lower than the rate of return using the borrowed moneyShareholders’ ownership interest is not diluted

22 If the company has preferred stocks outstanding then dividends must be divided between common and preferred shareholdersIf preferred dividends are cumulative, preferred shareholders will receive dividends in arrears and for the current year before common shareholders receive any dividends.If preferred dividends are non-cumulative, preferred shareholders will only receive dividends for the current year before common shareholders receive theirs.

23 Allocation of Cash Dividends when preferred stock is cumulativeDistribute dividends in arrears, if any, to preferredDistribute current year’s dividends to preferredDistribute remainder to common (or to both if preferred is participating)123456789101112131415161718192021222324252628293031272004123456789101112131415161718192021222324252628293031272005123456789101112131415161718192021222324252628293031272006123456789101112131415161718192021222324252628293031272007LO5

24 Cash Dividends ExampleStricker Company declares a $70,000 dividend in 2007 (no dividends were paid in 2005 or 2006). There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.

27 Stock DividendsIssue of additional shares proportionately to existing stockholdersCertificate of StockCertificate of StockCertificate of StockCertificate of StockCertificate of StockCertificate of StockReasons:Insufficient cashMarket price reductionNontaxable to recipientsLO6

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